IMF warns Dubai over new real estate bubble

The International Monetary Fund warned Dubai on Tuesday that the emirate might need to intervene in its property market to prevent another boom-and-bust cycle of the kind which brought it close to default four years ago.

Over-inflated Dubai real estate prices crashed by more than 50 percent in 2009 and 2010, triggering a corporate debt crisis which unsettled financial markets around the world.

The economy and the property market are now recovering, but so strongly that the IMF worries another bubble could form - and because Dubai's debt has continued to rise, it might have difficulty coping with fresh instability.

Harald Finger, IMF mission chief to the United Arab Emirates, noted that by one commercial bank's estimate, listed Dubai property prices soared 35 percent from a year ago in June.

"It is too early to speak of a bubble, but should price increases continue to take place at this pace, action will need to be taken to prevent a bubble," he said after annual economic consultations between the IMF and the United Arab Emirates.

Last year the UAE central bank tried to introduce caps on home mortgage lending as a way to head off another bubble, but suspended them after lobbying by commercial banks, which complained their business would suffer.

The central bank is now negotiating revised caps with the banks, but Finger said that because much home buying in the UAE was done with cash rather than mortgages, the mortgage rules would need to be complemented by other measures.

However, Dubai's business success has been built on a low-tax environment, and it is not clear whether the emirate would be willing to consider such a step.

Finger said he had discussed the idea of fees with Dubai officials, who had replied that they might be considered but would need careful coordination with the rest of the UAE to ensure that Dubai's competitiveness was not damaged.

Dubai property developers, many of them linked to the government, have announced a string of massive real estate projects over the past nine months, including high-end housing, shopping malls and amusement parks - reminiscent of previous building crazes that included the construction of palm-shaped man-made islands and other high-profile projects.

The Al Bayan newspaper, a UAE publication, calculated that if they all went ahead, the projects would require total financing of over AED666bn ($180bn).

Finger said that since Dubai's government-linked enterprises (GREs) were still saddled with debt from the last crisis, they would need to tread carefully to avoid being vulnerable if another bout of volatility in global financial markets hit the emirate's property sector.

"These projects increase business confidence, but they also call for prudent economic policies in order to prevent a possible build-up of a renewed boom-and-bust cycle in the UAE."

In a report, the IMF said the total debt of the Dubai government and its GREs had risen $13bn to $142bn between March 2012 and April 2013, reaching 102 percent of the gross domestic product of Dubai and the UAE's small northern emirates. Finger called that level "a source of concern".

The government's debt rose $4.5bn as Emirates NBD , Dubai's top bank, lent it more money. The concentration of ENBD's loans to the government is high, raising corporate governance and risk management concerns, the IMF said.

ENBD has said it is managing its loan book prudently and this month cut its estimate of non-performing loans this year because of a strengthening local economy.

The IMF estimates that about $64 billion of debt held by Dubai and the GREs will come due between 2014 and 2016, some of it the result of debt restructuring deals done in the wake of the last crisis.

A plunge in Dubai bond yields last year shows that financial markets believe the emirate will have little trouble repaying that debt. But the IMF said: "Although Dubai's operating environment improved markedly, these large rollovers, particularly for the GREs, could still prove challenging."

Dubai is boiling and overheating again. Some of us managed to survive the first time four years ago...I had to commute between dubai and Kuwait to maintain a family living in dubai...such scenarios can't work out every time...I know many others who were not half as lucky as I was.. They had to leave for good.. This time majority of us will move for good...simply we can't take two hits that fast and all because you are watching us overheating with interference to rescue a market that has finally reached balance and again you leave for those monopolistic cartel players....

No one is asking for the real estate market in dubai to be "cheap" or to lower the socio-economic class of dubai residents, yet when the average two bedroom goes back to 100,000 Aed, this is either a policy issue, a demand issue or a supply issue.

At this stage, we know there is high demand, there is restricted supply which can be loosened up, so we can only hope that policies ease supply so that rents can be reasonable again, and by reasonable i still mean expensive but, well at least, affordable to a middle manager making more than 80% of the population.

Soon, and unless you are on an expat package, you will no longer be able to afford anything above a one bedroom, its a sad that such an amazing life in this country can be dampened by its housing pressures.

How would Property company shows profit. Sell future projects show that revenue on them before starting to build any of them. The problem will be in how to maintain that profit if you will actually spend money to build these projects? The money is already accounted for !

IMF should focus on sorting out their own affairs. There is no chance of a bubble, in fact we are only in the initial stages of recovery. The very fact that over 85% are cash buyers sets the tone. The low interest rate scenario is another factor. There are no new master developments, now JLT, Marina, Downtown are maturing and new towers are getting launched. Things have never been better for Dubai Property. The next 3 years will be outstanding.

Posted by: I love Dubai
Thursday, 22 August 2013 7:36 PM[UAE]
- UAE

Boom, Boom, Booming.
Where are the Jobs, Why Dubai based organizations are still cutting on expenses as well as staff, why salaries are revised, why Nationals to be treated differently for opportunities if market offers great. Remember what is the contribution of Locals in Property Market, can they play role to cause increase of decrese in the Property Market. NO.
So its expats living in UAE or outsiders finding it safe heaven, but for how long....What Next, is it sustanable, can one survive on paying such high rents for couple of months without Job. I love Dubai, It is my home outside my country, but things need to be mature, controlled, helpful and remain Peace of Mind.

Posted by: The Consultant
Monday, 5 August 2013 11:25 AM[UAE]
- UAE

I think you will find that making economic forecasts about the nations of the world is very much part of the IMF's "own affairs".

The rest of your post could easily be a cut n' paste from 2007 - in fact there are so many posts like this these days we could just adopt a bit of shorthand "*CNP2007*" would probably do it...

Remember also that at the peak of the market the dollar (and hence the dirham) were heavily undervalued and some people were using Dubai property as a currency play as much as a real estate investment - so in (for example) Rupee, Sterling or Euro terms any given AED price is now anywhere from 15% to 50% more expensive than it was in Q1 2008, making the peak prices achieved then even more remote than when analysed from the perspective of a non-USD foreign buyer.

Posted by: Jake
Monday, 5 August 2013 11:24 AM[UAE]
- UAE

Firstly, denying a bubble in the same statement you mentioning an outstanding performance for a span of 3 years is rather contradicting itself. Then you go on to mention that 85% of the buyers are doing so with cash is another indicator for your return of the bubble. Where is that cash coming from? Why would they park it here? surely these guys aren't the enduser anyway, those individuals were put off by how the crisis was managed. Lastly, there hasn't been much change in the regulatory framework that could prevent the next bubble from happening, so your desert dream could be rather short lived. Looking at the rental market, the next 3 years could be really tough for the majority of the population.

Posted by: Mark
Monday, 5 August 2013 11:23 AM[UAE]
- UAE

Mmmmm, our Government seems to disagree with you Desert Dreamer, they are changing the laws regarding 'flipping' because they are worried about another bubble in the property market with all the new maga-projects about to start.

Posted by: Billy
Monday, 5 August 2013 11:20 AM[UAE]
- Uk

I would hazard a guess they know more about it than you do. Typical response from someone who does not understand just how much of a mess Dubai is in and that the rest of the world looks on laughing.